A Basic Introduction to Crypto Currency

A Basic Introduction to Crypto Currency

A Basic Introduction to Crypto Currency

How does a traditional banking system work?

The traditional banking system works on Fiat money such as the U.S. Dollar. The Dollar is a reserve currency, that can be printed at will when needed and has to supply cap. A few problems with the traditional banking system is manipulation of figures, exchange rates, tampering by high profile bankers and the government, this is possible because money can simply be printed when needed which also decreases its value as the supply increases. Additionally, the largest problem with the traditional banking system is fractional reserved banking. Fractional reserve banking allows the banking institutions to loan more money than cash they have on-hand. So if all debts were called in and the bank had to come up with the cash to pay them it could not because they are allowed to lend more money than they have.

Some other disadvantages of the traditional banking system are centralization, slow transaction times, clearing houses domestic and international, etc. I recently read a story of a company in the U.S. that need to send $30 million dollars to a manufacturer in China which had previously taken them approximately 30 days to send the money and have it cleared and converted into Yuan and then manufacturing began. Now they use bitcoin to transact that money and the transaction is complete and in the Chinese manufacturers wallet in less than 2 hours.

Crypto Currency History:

On 18 August 2008, the domain name bitcoin.org was registered. In November that year, a link to a paper authored by titled Bitcoin: A Peer-to-Peer Electronic Cash System was posted to a cryptography mailing list. This paper detailed methods of using a peer-to-peer network to generate what was described as “a system for electronic transactions without relying on trust”. In January 2009, the bitcoin network came into existence with the release of the first open source bitcoin client and the issuance of the first bitcoins, with Satoshi Nakamoto (an unknown person or group still to this day) mining the first block of bitcoins ever (known as the genesis block), which had a reward of 50 bitcoins.

This system of digital currency is completely based on math using cryptography and cryptographic hashes.

What is Cryptography?

Cryptography involves creating written or generated codes that allows information to be kept secret. Cryptography converts data into a format that is unreadable for an unauthorized user, allowing it to be transmitted without anyone decoding it back into a readable format, thus compromising the data.

For example a type of cryptography would be a cipher text, the enigma machine used in WW2, encryption used in our daily lives whether or not you realize it. Most connections across the internet are now encryption on some level. A decent encryption in 2017 is 256-bit AES encryption which almost (I hope) all banks use. Even with all the super computers today it would take hundreds of years to crack a 256-bit AES encryption. (Please note quantum computers will change this)

It’s estimated it would take a hundred years and about 5 billion dollars to create 1 fraudulent bitcoin at this time.

What is block chain technology?

The basic concept is a simple and universal one. We have information that we don’t want accessed, copied, or tampered with, but on the internet, there’s always a chance it could be hacked or modified. Blockchain gives us a distributed ledger which must follow a specific set of rules and is verified by thousands of nodes (users like you and I) creating a trustless system. More on how the blockchain verifies transactions on the public or private ledgers using proof of work and proof of stake methods below.

What is Crypto Currency?

Cryptocurrency is a digital currency (coin) that uses encryption (cryptography) to generate money and to verify transactions. Transactions are added to a public ledger – also called a Transaction Block Chain – and new coins are created through a process known as mining. There are two types of mining Proof of Work (POW) and Proof of Stake (POS).

POW requires proof that work of some kind occurred. In the case of Bitcoin miners are required to do this work before any of their blocks is accepted by others. Many coins use many different algorithms or combinations of algorithms and other security technology to build their blockchain. POW is common when you hear of people using computer graphics cards and central processors for mining.

POW requires users that have a high stake at the currency (i.e. hold a lot of coins) to determine the next block. This has a high risk of some party achieving monopoly of the currency but there are several methods to prevent that (by allocating random stakeholders to agree on a new block, and others).

The main difference could be summarized in that proof of work requires burning an external resource (mining hardware) while proof of stake does not. Proof of work could be criticized that if price/bitcoin rewards/fees drop then less people have incentives to mine thus the security of the system is reduced. Proof of stake could be criticized that since it is free to stake/add new blocks to the blockchain you could use it to stake several similar coins at the same time.

With that said blockchain technology and a digital cashless system is not without its faults but there has already been a massive improvement in prevention of mining monopolies and staking monopolies. That improvement is the average person and power in numbers. As the market for cryptocurrencies grows so does the power of the average person.

What are some of the advantages of crypto currency and use cases (outside of banking) over traditional banking?

The system is trustless without a central governing authority. Instead it’s governed by everyone with a computer who is mining or staking or running a masternode (which helps to process transactions and keep the ledger in sync).

Anyone can use crypto currency at any time in any country regardless of financial status, citizenship, etc. There are no long forms to fill out, questions asked, nothing you just download a wallet. (Currently you do need to use Fiat $ to get your coins although in a not so distant future this will change)

There are no spending limits, no monthly fees, etc.

Referring to my short story earlier transactions can go across the world end-to-end in hours, minutes, and with some new cryptocurrencies seconds.

24/7/365 access to the crypto currency market for trading (buying/selling) think the stock market 24/7/365. You can spend or receive your money anytime there is no need to wait until the bank opens. Your crypto currency account cannot be levied.

Substantially, lower fees think pennies vs dollars.

With crypto currency there is no debt, no IOUS, nothing of that sort. (massive debt problem today in most of the developed world is revolving debt for individuals, businesses and governments which ultimately is an unsustainable system)

Smart Contracts – Set the terms and conditions and once executed it cannot be changed. A simple use case is a smart car automatically parking in a parking lot. The smart contract pops up on the screen in your vehicle – 1 hour of parking time for $5 etc. You are electronically bound so no matter what the case is this contract is irreversible until completed. (People will definitely need to be more cautious and think more in the future)

Sharing Economy – With companies like Uber and AirBnB flourishing, the sharing economy is already a proven success. Currently, however, users who want to hail a ride-sharing service have to rely on an intermediary like Uber. By enabling peer-to-peer payments, the blockchain opens the door to direct interaction between parties — a truly decentralized sharing economy results.

Crowd Funding – Crowdfunding initiatives like Kickstarter and Gofundme are doing the advance work for the emerging peer-to-peer economy. The popularity of these sites suggests people want to have a direct say in product development. Blockchains take this interest to the next level, potentially creating crowd-sourced venture capital funds. An ICO instead of an IPO.

Governance – By making the results fully transparent and publicly accessible, distributed database technology could bring full transparency to elections or any other kind of poll taking. Ethereum-based smart contracts help to automate the process.

Supply chain Auditing – Consumers increasingly want to know that the ethical claims companies make about their products are real. Distributed ledgers provide an easy way to certify that the backstories of the things we buy are genuine. Transparency comes with blockchain-based timestamping of a date and location — on ethical diamonds, for instance — that corresponds to a product number.

File Storage – Decentralizing file storage on the internet brings clear benefits. Distributing data throughout the network protects files from getting hacked or lost and it utilizes unused space on billions of computers thus creating a greener planet and making any participant some coin of choice.

The bottom line is even if block chain never replaces Fiat money and only becomes parallel to it there are literally thousands of use cases and applications that have already popped up that utilize block chain technology.

What are the major Coins?

Bitcoin, Ethereum, Litecoin are the currency major coins.

In my opinion it should really be Bitcoin, Ethereum, Dash and NEO – but those changes take time

What are alt coins?

Alt coins are smaller coins that are not considered the major coins. Many of them are scams or just do nothing special and have a nice name that people want to get behind like sexcoin or potcoin. However, there are a few dozen very promising coins using blockchain technology to do some very interesting projects which have far reaching real world applications but that’s for another discussion. These coins are also NOT available to be purchased directly against Fiat currency and are instead traded against bitcoin and ethereum in most cases.

How does the digital money system work?

Additional Information:

Cryptocurrency technology is advancing at a rapid pace allowing for faster transactions to take place with greater security. Cryptocurrency also provides a platform for small businesses to raise money without using traditional methods such as loans, angel investors, large private investors, etc. Instead people such as you and I can invest a small or large amount of money to equal a greater sum to get the company going and in exchange we get coins (similar to stock shares).

Cryptocurrency works almost exactly the same as the current stock market does. Although, currently, there are no regulations they are coming and fast I think within the next 2 years as cryptocurrency is going mainstream. The current market cap for the entire market is past $200 billion which in the grand scheme of Fiat is a dwarf but about $150 billion of that money has come into the market in the past year and a half alone. Some folks have fears that it’s a scam, a bubble, or that it will be made illegal by a government but that doesn’t matter because it’s decentralized and cannot be stopped unless every country in the worlds bans all cryptocurrency.